President Donald Trump and Sen. Bernie Sanders don’t agree on much. But they both believe in price controls.
Both men recently introduced separate proposals to impose price controls on prescription drugs. Though both men are likely well-intentioned, their plans are deeply misguided. Both proposals would discourage drug research and reduce access to medicines.
The Trump administration’s proposed rule, released this fall by Health and Human Services Secretary Alex Azar, would change the way Medicare pays for most cancer drugs and other medicines administered in a health care facility. Currently, doctors buy these drugs up front and Medicare reimburses them for the cost, which is pegged to the medicines’ average sales price.
The administration wants to instead peg payments to the artificially low prices paid in 14 foreign countries that embrace price controls. The administration claims this change would save taxpayers $17 billion over five years.
Mr. Sanders’ bill goes even further. Instead of capping prices only in the Medicare program. it would extend the arrangement to all U.S. pharmaceutical sales. His bill would require drug companies to charge no more than the median price paid in Canada, the United Kingdom, Germany, France and Japan. If companies refuse to comply, the government could invalidate companies’ patents and allow competitors to produce cheaper, copycat medicines.
Artificially capping drug prices would discourage research. Developing a new prescription drug is an extremely risky endeavor, typically taking up to 15 years and $2.6 billion. The failure rate is extremely high; about 9-in-10 experimental drugs that enter clinical trials never receive regulatory approval. Investors are only willing to fund this risky research because they might profit if a drug is successful.
Price controls prevent drug companies from even having a chance to profit, thus destroying the incentive to invest. According to a 2018 analysis by Precision Health Economics, a consulting firm, lifting price controls in the world’s 34 Organization for Economic Cooperation and Development countries would boost pharmaceutical revenues up to 30 percent. The resulting increase in R&D spending could result in 13 additional drugs launched each year by 2030.
The Trump administration has rightly condemned foreign countries for freeloading off U.S. research efforts. It’s deeply unfair that the United States, with its relatively free market for drugs, is forced to fund roughly half the world’s total pharmaceutical R&D. But the solution to foreign freeloading isn’t to copy other nations’ price controls and stifle innovation here at home. Rather, the solution is stronger trade policies that encourage other nations to value innovation.
Lives depend on continued research investment. Sixty percent of U.S. adults live with at least one chronic disease. Forty percent battle two or more of these conditions. These patients need government policies that fuel medical innovation.
In addition to improving health outcomes, such policies could actually lower health spending. Alzheimer’s disease alone afflicts nearly 6 million Americans and costs our nation $277 billion each year. The number of Alzheimer’s patients is forecast to more than double by 2050. Finding a therapy to delay the onset of Alzheimer’s by just five years could save the United States $218 billion annually by 2050.
Such a therapy will never be developed if the Trump White House or a future Democratic administration imposes price controls.